Tag: private equity

Macfarlanes: politics, funds & private markets

Fund Shack
Fund Shack
Macfarlanes: politics, funds & private markets
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The so-called perma-crisis of political and economic volatility witnessed in the UK, and beyond, has made the business of raising and investing long-term funds is even more uncertain than usual.

To help private markets practitioners navigate these choppy waters, we spoke with David Gauke, Damien Crossley and Shailen Patel from Macfarlanes.

David Gauke is one of the most senior former politicians to be working in private markets today. He was responsible for the UK’s tax system as Exchequer Secretary to the Treasury and then Financial Secretary to the Treasury, followed by Chief Secretary to the Treasury, Secretary of State for Work and Pensions, and Lord Chancellor. He is now head of public policy at Macfarlanes.

Damien Crossley is head of tax and reward at Macfarlanes, where he advises fund managers on fund formation, remuneration and investment structuring.

Shailen Patel is head of the firm’s corporate advisory, focusing on financial, strategic and regulatory matters for asset managers and private markets.

The trio are ideally placed to appraise the market context for private capital participants in 2023.

Enjoy!

Macfarlanes, David Gauke

Laura Dillon, Waterland Private Equity

Fund Shack
Fund Shack
Laura Dillon, Waterland Private Equity
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Laura Dillon leads Waterland Private Equity’s Dublin office, which she established in 2020. Laura has had a varied career both in private equity and business. She has worked at several private equity firms, including Apax Partners and Riverside, and set up a distribution business with her family that was sold to a corporate acquirer.

In this podcast, she talks about her career to-date, the opportunities in the Irish private equity market, and her experience of working within Waterland’s international mid-market investment operation.

Paul Newsome, Unigestion

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Fund Shack
Paul Newsome, Unigestion
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Paul Newsome is head of portfolio management at Unigestion, a Switzerland-based asset manager with a global private markets platform.

Paul has been at the firm for two decades, during which he has set up its private markets operation in North America, and has been instrumental in establishing its directs, co-investment and secondaries programmes.

In this discussion with Ross Butler of marketing services consultancy Linear B Group, Paul reveals the international growth story behind Unigestion’s expansion across private markets investment, how the asset manager makes effective investment-decisions (with reference to their proprietary AI tool), his reading of the prevailing market volatility and what it means for investors and the asset class, and his outlook for further industry growth.

If you want a crash course in private markets asset management at the turn of 2023, you are in the right place.

Michael Lindauer, Allianz Capital Partners

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Fund Shack
Michael Lindauer, Allianz Capital Partners
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Michael Lindauer is co-CIO of Allianz Capital Partners. He joined the institution in 2003 and has been an influential decision-maker with regards to backing private equity managers, and a respected and informed LP. He is based in Europe and has responsibility for ACP’s global private equity investment programme.

He talks to Ross Butler of Linear B Group about Allianz’s investment business and market-view, approach to GP selection and terms, and much more. This is a must-watch conversation for any private equity manager who wishes to understand how an experienced and thoughtful institutional investor approaches fund investment opportunities.

Jim Strang, private markets – the inside track

Fund Shack
Fund Shack
Jim Strang, private markets - the inside track
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Jim Strang is chairman of HgCapital Trust, a senior adviser to CVC Capital Partners, independent director at the Business Growth Fund, a senior adviser at Bain & Company, an advisory director at Campbell Lutyens, a Fellow at the London Business School, and a senior adviser at Hamilton Lane.

Back by popular demand, this is Jim’s second time on Fund Shack. We talk about the state of private markets and how the industry grows from here.

David Ewing, ECI Partners

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Fund Shack
David Ewing, ECI Partners
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David joined ECI Partners, one of the UK’s oldest buyout funds, in 2001 and is now co-managing partner. He started out in software and has completed several landmark deals, including the UK’s first buyout of a native digital business and the UK’s first buyout of a native SaaS business.

We talk about software investment, the UK’s competitive edge, originating deals in the mid-market, expanding internationally, and the prospect for private equity returns.

Mirja Lehmler-Brown, Hayfin

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Fund Shack
Mirja Lehmler-Brown, Hayfin
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Mirja Lehmler-Brown is the founding managing director of Hayfin Capital Management‘s Private Equity Solutions investment team.

She previously worked with Hayfin founder Tim Flynn (listen to his Fund Shack podcast here) at Goldman Sachs, before moving into PE fund investment with Aberdeen Asset Management and Scottish Widows.

Ross Butler (00:00):

You’re listening to Fund Shack. I’m Ross Butler. And today I’m speaking with Mirja Brown, a managing director with Haven capital management. Mirja started out in investment banking with Goldman Sachs and then worked in asset management with Scottish widows and Aberdeen. She joined Hayfin to establish and build its private equity solutions business. We talk about setting up and growing an investment function from the ground up manager selection, direct secondaries, and investment opportunities across Europe. Welcome to fund shack. You joined Hayfin in 2018. I think that’s correct. Tell me, how did you get involved with it

 Mirja Lehmler-Brown (00:38):

Started quite a long time ago, Tim Flinn, our CEO, and founder worked at Goldman Sachs.

Ross Butler (00:45):

Who we’ve had on Fund Shack 

Mirja Lehmer-Brown (00:46):

Yes, and we work together at leverage finance. In fact, we’re sitting next to each other and I left, Goldman Sachs to move, up to Scotland. My husband is Scottish, but we stayed in touch over the years. And so I, heard the story evolve from him leaving and then coming up with the idea to set up, HayFin. And, you know, we exchange ideas and views and, and shared learnings up in Scotland. I started to invest in private equity with Scottish widows initially. And that experience from an LP perspective was also interesting, you know, to Tim when we started out. So when he sat up, he, had discussions with a few different private equity funds and he asked my views on who they were and what potentially could be a good partner for him early doors. So, that then turned into him growing, uh, or him and his team growing the business.

 Mirja Lehmer-Brown (01:47):

And in 2070 that institutional investor changed to British Columbia investment management corporation. And he’d grown the business from lending and other different products within the credit space and never, ever kind of, I guess, before considered the equity, opportunity. And that’s where I then spent over 10 years up in Scotland. And, so he asked me if I would want to, what would I do if I would set up a private equity mid-market business for, British Columbia? How would that look? And would I be willing to do that on his platform? So I did that and come up hopefully with a compelling strategy because British Columbia certainly thought it was a good idea. And that’s why I moved over in 2018 to start from scratch with, with no team, no processes, but a fabulous platform and brand in form of Hayfin.

Ross Butler (02:49):

So that sounds like a great opportunity, but, quite an unusual one, because you had a very large institutional background. So you sat next to Tim and you were doing presumably were doing credits at the time, is that correct?

Mirja Lehmer-Brown (03:00):

Correct? Yes. So Goldman Sachs, but from Scottish widows. So when I started, there was only private equity, only Europe, predominantly mid-market and across the spectrum from funds investing from co-investing and also secondary investing, which is three of the larger group of investing that you can do in the private equity market as an LP investor.

Ross Butler (03:24):

So why did this kind of more entrepreneurial opportunity of setting something up from scratch appeal to you?

Mirja Lehmer-Brown (03:29):

Very good question. I come from the middle of nowhere, in Sweden and I’m actually the first person in my family to go to university. So arrogance and Politics are something that I can say I’m allergic to. And in a large institution, I think when you start out working you’re so focused on delivering a good job that you don’t notice political aspects. I think as you grow older, more experience wiser, you start to figure out that it’s not just about that delivering. It’s not just about the excellent, it’s lots of other things going on as well. And at that point, after 10 years in a consolidating Scottish asset management market, it’s been a number of combinations that we had gone through much larger group and, the firm had become very political and that again is something that’s really frustrating. And I also just in itself, for me, I’m driven by delivering really good investment return based on facts.

Mirja Lehmer-Brown(04:35):

And in that, the energy really needs to go to originate, discuss ideas, pick the best investing. If you need to worry about Politics, how you need to behave or not challenge or challenge. There’s so much energy leakage out of a team or an organization. So that frustrated me and triggered to think, well, if I start from scratch and I can set the culture, I can handpick a team. I can obviously ensure that we have none of that, that we can be a group of individuals with different backgrounds that burn from the same purpose in delivering those returns very often for pensioners, but in a way that then avoid negative aspects such as Politcs.

Ross Butler (05:29):

And so you’re only what three years in that state. I mean, how’s it going from a cultural perspective? Have you been able to, introduce that kind of different culture?

Mirja Lehmer-Brown (05:39):

Yes. It’s, it’s um, it’s going really, really well. I mean, you know, back into the entrepreneurial aspect, it can be scary too, when you haven’t done that before. And you can question yourself whether you’re able to, I mean, from sheer experience, point of view, you build so many networks, you build so much pattern recognition that, that clearly you can take with you, but, but you know, where people come and join you as an individual, is scary. But I think the fact that we talk with so passionately about the fact that it’s team-based and that everybody is equal if you will. And we start, we start with the junior people, sharing their ideas fast up into the senior, and there’s lots of frustration. Now, the private equity industry has grown up and many of these organizations have been quite large.

Mirja Lehmer-Brown (06:33):

That means lots of mid-level and junior, uh, uh, staff. If you’d be, look, people are frustrated with the same thing I was frustrated with. And if you see the people we were looking for, work Lilly, high-ability ambitious people, but then driven by the same values and principles of team, of responsibility of doing the right thing, are working hard clearly, but fact-based. And then also this continuous improvement mindset were also the senior people want to invest in the junior, learning by doing the type of job. You don’t read some books or become a good investor, but genuinely if you have as a mid-level and junior in a person genuinely feel that the senior person sit there for you, side-by-side they roll their sleeves up and want to transfer that knowledge to you. It’s a wonderful proposition. And hence it took a little while because it was not noon, you know, from a brand perspective on the equity side, but windows discussions, clearly lots of people that didn’t fit in.

Mirja Lehmer-Brown (07:42):

But there were a lot of people that were intrigued and were really looking for the same things. So now we’re a team of eight people and again, operating very much under those types of ideas and principles, you know, living, breathing that culture. And hence, that’s the most satisfying we are, did the strategies working and the performance coming through strongly now after three years, which again is interlinked. It helps the culture help the feeling of wanting to come to work. You know, the belonging of being there when it all works. But I think it’s driven very much by the cultural elements of it.

Ross Butler (08:23):

Yeah. Success definitely helps. Did I hear you say tha, junior people speak first?

Mirja Lehmer-Brown (08:29):

Yes. Around our, so our investment processes such, institutional three steps, that’s no different, but when we, um, you know, start in the team, so the first lab level, the one-pager, everybody is expected to readapt to a certain degree and we start with the most junior person. They need to share their views fast. And, everyone comes in many have banking background when they come in more of the mid-level, people when they joined, came from private equity, but none had really had that experience before. So when they joined the team meeting and were discussing ideas, they were not prepared. She was say, first time around the fact that they needed to express their views. First, second time around, they were very prepared. And why we’re doing this is it’s the same thing. As many things you can’t tell to children to avoid mistakes, they need to do it themselves in order to properly learn and invest in.

Mirja Lehmer-Brown (09:32):

There are so many different aspects in the pattern recognition. You know what you need to think about. And we obviously have strong protocols and processes to help along the way, but it’s really your judgment. Your thinking. If you listen to other people, you don’t really learn what is important. If you need to read about the company in a situation and you come up with your views, a unit of thought it through it’s your views. Um, and very often initially they are not filtered or the weightings are not, you know, where it should be, but it doesn’t matter because, for us, it doesn’t matter. It’s the only way to learn. So we look at a lot of things. We originate a lot of things. It’s part of our model, but we do be very, very disciplined. So we do very little, but the more we look at, the more we discuss, the more we learn and the more they learn in, changing, adjusting the way your thinking to become more balanced in their view and also go away from, is this used to good company and just come to a good company. It doesn’t necessarily become a good investment if you pay too much. So it’s just learning around companies is certainly important management teams and pricing and structure and part of value creation. And, and with that, quite quickly you can see the evolution in their thinking, their alignment with the filter, and how we assess where their, a situation is a good investment or not. And that’s also great to see

Ross Butler (11:03):

Tim said to me about, diversity, but from a very broad perspective, um, which is making sure that you’re not hiring in your own mold and making sure that, everyone, not just from the gender or racial perspective, but also in terms of, uh, the way people think and their economic backgrounds and all of that. But it can be in practical terms, it can just be very easy to, to, to instruct a recruitment agency to say, we want people from Harvard and Oxford and, you know, and suddenly you’re already going down that route. To what degree do you feel you’ve achieved some level of let’s call it intellectual diversity around the table so far.

Mirja Lehmer-Brown (11:37):

Yeah. And there are so many layers to it and we are eight people, but we are all different nationalities. And many of us have, not even two, I’m half Swedish, half German, and that’s only part, but, you know, it’s the language, it’s also the culture, the way you have been brought up, which then, the principles and values, because while do want, diversity in thinking for sure, diversity in pattern, you want a different type of pattern that recognition, but you still want the same values. You need to find a group, that, that those principals on why we are here needed to be the same, even if we are value-add from the pattern recognition in analyzing deals

Ross Butler (12:21):

Now in terms of your actual business, maybe could you set up for us, you know, your mandates, what, what you are investing in and where are your sources of funds?

Mirja Lehmer-Brown (12:30):

Yes. So we are, continue we’re backed by our Canadian as a British Columbia investment management corporation. And the strategy is the European mid-market. One of the things when I analyzed, uh, you know, setting up in 2018, because it was different when Haven was founded, they were very early into a new growing market that, the market of direct lending, private equities, quite mature. So one of the things that we did, I feel that the, in my view, the private equity industry has created silos very often. There’s a separate, product for primary funds or a second, separate silo bucket for co-investment or a sec, you know, secondaries have a different bucket. And I felt that for us doing mid-market, we don’t want any restraints. We want to be able to originate across the board and just focus on picking the right that the best opportunity is flexible across your mid-market.

Mirja Lehmer-Brown (13:30):

The larger funds, larger companies to a degree, you can say, I guess it’s less risk. So it’s a different style of investing and different returns, mid-market, or to generate, a premium return in comparison to the larger market. But if you look in the dig into the track record, people have all failed in doing that. And it’s been too much volatility. So when we set up, but we want to do, if we have one bucket allows us to, one year, maybe they’ll be more opportunities in, in co-investor as of late, this GP led, uh, secondary, a single secondary, which we do in Medan, several of them, but it’ll go, you know, one year or another year, it’s slightly different. If you only could do one type of investing, it’s very hard. And also very often the solutions we do, the fact that the same team can do a combination of investing that otherwise might fall in between the buckets is very powerful.

Ross Butler (14:31):

So in larger competitors, would there be a separate team for co-investment, or all your guys, do everything?

Mirja Lehmer-Brown (14:38):

All the guys, do everything to avoid things, falling off the cracks and allow for, for more opportunities and more discipline in what we do. And that’s been really helpful. And it’s already evolving, we’re now on our second program, and it’s gone from slightly more funds than you start out, also generate some of the co-invest opportunities to now coming out of the COVID where, this GP led market on the concentrated end, which has been around for a long time, but it’s really exploding. And that suits our skillset because we have built a team of stock pickers, very well. And we don’t, again, because we haven’t got a bucket. We don’t mind, it’s an asset opportunity. We don’t mind if you call it a secondary or a co-invest in what we do. And, also we find that the relationship, uh, from the primary side because the core thing with the GP led is also understanding why, why do they want to do this? And it’s the right thing for them and the acid, which if you have followed funds for 10 plus years, and they know the individuals in these funds, you will have a much stronger view on whether it’s the right thing to do. Not just numerically, but because we focus on both. So you gain that experience from primary funds investing is very helpful across the board. But particularly I would have said in the GPLS single secondary situation

Ross Butler (16:13):

When you’re setting up a new business like this, I guess the challenge is that you don’t have any existing relationships because the best managers will have long-standing relationships, although you were in the market yourself before.

Mirja lehmer-Brown (16:29):

Same thing, the principle of Hayfin, working with very experienced people. So, we hired Gonsalo Aras who co-led this, the private equity solutions team with me are very experienced from different some overlapping, but predominantly, uh, different parts of Europe and different types of relationships. So we bring that eminent relationship that you have as an individual is personal, it’s partially linked to the brand. It’s got its widows where you stand for, but moreover, when you’ve gone for, for, you know, over 10 years and, and quarterly knocked on the door on people to have a coffee, the Swedish way to have a coffee, that’s how you build trust that you take with you, because in the end now, in particular, there is so much capital the capital in it says, doesn’t matter. People want to choose an individual relationship that they feel they can work well.

Mirja lehmer-Brown (17:32):

It needs to be a high-quality type of capital, the quality of capital matters, but its excess. And then you go down to a more personal element. Is this an individual? I feel I can trust, is this, we can have a dialogue with somebody that is constructive and helpful to us. And that’s in the end to me why people choose, to work with somebody in a fundraise or in a co-investor opportunity or in this teepee lads, they’re really attractive opportunities. GPs have a choice. And the choice very often in who they select is just part capital and a lot about who you are and what you stand for and what type of relationship that you built.

Ross Butler (18:18):

Yeah, it’s a people business because you’re committing, you’re not just investing.

Mirja lehmer-Brown (18:24):

And I do think the nice thing, the additional benefit from setting up the entrepreneurial side, which originally I didn’t think of. So originally we’re more of the strategy being differentiated, the culture, being different shaded, and also the discipline. And I guess the credit focus from Hayfin to avoid the volatility in the mid-market. But the additional benefit is we are not entrepreneurs. The whole team, we call, is the founder team, every single one of my team, we are together. We are, the founders are our track record together. And we built this from scratch that also when we sit down very often, the mid-market, they’re also founders of their funds. So we can discuss the challenges of hiring people, motivating people, motivating the younger generation with certainly different to kind of the older generation systems, how that work or I see, but it becomes a different type it’s equal partner to partner. And we’ve gone through the trenches in a similar way, which also add to that, you know, the strength of that relationship.

Ross Butler (19:35):

Can I ask, what proportion are you roughly, in terms of, direct fund payments versus the more tactical approaches, co-investment and secondary and so on, and where, where would you like to be?

Mirja Lehmer-Brown (19:48):

You know, the core initially is the flexibility and the first program. So the first investment program was more than 55% funds and, you know, 45% asset opportunity because we don’t really split whether it’s co-invest or a GP-led opportunity. Out of COVID came an additional need for asset capital. It was too much, co-invest capital, but not always co-invest capital in the professional form. And, you know, out of it came, people want to work with a professional partner, a partner from the co-invest, not just in this indication, a partner that can be fast and have their own view, their own view of the asset that underwrite the asset themselves. They, you know, through COVID there were issues in co-invest and some, LP co-investors were worried about the performance and that created some friction in the relationship, the GP and LP so that, you know, the evolution of that was that the GP was happy or to work with somebody who did their own work.

Mirja lehmer-Brown (21:05):

So, you know, if we pick wrong, it’s not the GP’s fault, it’s our team’s fault that this, we would never blame a GP for offering us an opportunity. It’s our own process. And we would, you know, I don’t like blaming, but we will make mistakes, but we will be in ourselves. So that I think has been very, positive. So we’ve actually seen way more co-invest opportunities than I thought beyond the fund investments that we do. And then as I indicated, this deeply led market, this is full exploding. So the new program that we’ve started, or the second program we start,

Ross Butler (21:40):

Can I just ask you a question about, co-invest first, and then you can tell me about GP.

Mirja Lehmer-Brown (21:46):

I’m just going to say, so the proportion is 70%. So now 70% asset opportunities and 30% funds

Ross Butler (21:51):

I’m sorry, you still answering my question. 

Mirja Lehmer-Brown (21:54):

I was trying to 

Ross Butler (21:57):

It’s a different skill set, isn’t it? Assessing single asset opportunity versus, and so you’ve got a team of eight and they’re already looking at fund investment co-investments and these tactics, and, but they’re also looking at, company’s specific opportunities.

Mirja Lehmer-Brown (22:12):

So the co-invest, that’s why in the secondary market, it’s been a lot of this LP stake. So when an LP center sells to another LP, we don’t focus on that. That’s very different. It’s broad, diversified portfolios, it’s more cashflow pricing. So that’s not, it’s a very good market to be, but it’s not what we do, but where we have married every single one that we have hired, our focus on developing skills, in picking an asset, which is also aligned with, HayFinn is just from a credit perspective versus the equity perspective. In addition, my view has always been that if you are a good fund investor, that will help you as well to understand because when we select an asset, it’s not used to kind of do the numbers on whether that is a good investment. We very often need to understand why is that GP the best owner of that assets?

Mirja Lehmer-Brown (23:11):

Why would they be the good part of helping the value creation in that business? And that are more aspects that you focus on from a fund investment perspective. So certainly, you know, it’s certainly super value add even if the core skill to a degree is the fact that peeling the onion on the investment on an asset investment opportunity. That’s why, if you now go and look at very often the large secondary funds, they have predominantly priced cashflows because the market on the LP stakes side was so much bigger. They need to carefully think if they now, recycle their individuals to look at this more focused opportunities on the secondary side. One very often risk-return spectrum, very different from this portfolio, diversified cash flows. And as you rightly said, the skill set needed to do that is also very different.

Ross Butler (24:16):

So kind of from a philosophical perspective, your team feels almost more aligned with the GP mentality than perhaps the traditional institutional LP mentality. Would that be fair?

Mirja lehmer-Brown (24:28):

I think that’s a very good observation because we work very much like a GP. We source a lot of situations and we are very disciplined around the picking, and think much more like an act in that sense, much more like a GP.

Ross Butler (24:48):

What is it that attracts you? What would you look out for?

Mirja Lehmer-Brown (24:51):

That’s a very interesting question and actually linked, uh, the mid-market and pitfalls of the mid-market. Because if you look at the larger funds, CVC, or admin, it doesn’t tend to be people-dominated anymore. They have very strong processes. They have sector teams, they’ve got lots of operators around, they still need to be mindful about culture and how they drive organizations, but it’s a different type of diligence. In the mid-market, it’s much more, person and culture-dependent. When I started in 2006, the, um, the way people did fund investing back, that was much more numerical. You went through a track record and then, you know, from that track record, you looked at the processes and the track record. And I thought, oh, this must be good people in the future as well. And then I said, but how can that be?

Mirja Lehmer-Brown (25:47):

Because that investment will never come back. So the motivation of, and the process of choosing it and the skill set in the people align, those are the more important elements to review in order to access future performance. So in my own learning, coming from the sell side, it took some work, but I really felt that that lots of people went about it the wrong way, just focusing on numbers. So from that came a completely different type of filter, a hundred-point scoring system that, in addition to strategy and, processes and track record very much focused on the culture. Leadership, what are the motivators? Why are these people doing this. Organization? And the room in the ration linked to organization. Decision-making, functional team, dysfunctional, and those elements are much harder to assess, and to figure out, you need to look for them and you need to build that pattern recognition to see what works, what doesn’t work.

Mirja Lehmer-Brown (27:08):

We are very focused on team-based. Very team-oriented, team-based decision-making teams, where also remuneration tends to be diversified if you will, rather than very strong founder-led businesses, because we think it is, reducing risk as one element. And the fact that back to what we said, that you haven’t got the dominating individual that shut challenge out, it could temporarily look good, but again, that’s a risk from our point of view. And very often when we go in meetings, the questioning is very much. So why are you here? What motivates you over and over again, with every person in the team to get the sense for what they’re saying, what they’re not saying, and, the general, yeah. To try to assess that culture again, because that we have found is a core KPI in assessing future performance.

Mirja lehmer-Brown (28:15):

You need to have local reference points, not their reference points. Very often, I say, that’s why it’s so fundamental to us to be local. Well, I’ll figure out I’ve gone to school with you. Uh, you know, in that referencing is there is a joined connection. We’ll have worked together. We will have gone to the same school, I’ll know someone that knows someone that will know your neighbor in order to that picture, that you tend to portray of you and your team, whether we feel that that’s transparent and true. So we do that first-time funds, which we do. We tend to do 50 reference calls, most of them off a list, and that you can only do if you have long-standing relationships on the ground that trust. And we’ll tell you because they know that your integrity is integral to who you are.

Mirja lehmer-Brown (29:11):

They will tell you how it is, and that is impossible to recreate if you’re far away and impossible to recreate in the mid-market because the regions are so different. Yes. So the portfolio is doing, doing well. Is it really well? Yes. And I think the third thing with this and discuss starting in 2018, setting it up, I thought we would have had a recession since 2016. So I was a bit afraid of 2018 as a starting point in setting up a new program. And so the third part of how we were doing it was to focus on a really resilient, resilient sector and resilient business model. And that was predominantly the timing, the 2018, and that belief in, within the investment period, there will be a correction. And from that, and LinkedIn to in Europe, you haven’t got as many sector funds as in comparison to the US but we believe in sector funds in that, again, it’s the pattern recognition.

Mirja Lehmer-Brown (30:15):

If you spend way more time in one sector, you can reuse your learnings much faster. And with that, the portfolio with them put into the ground in the first program is 70% healthcare and technology combined. And the rest is resilient service model. So clearly we had no idea about the health crisis, but we’re preparing for a correction. So with that sector waiting not only is our performance, the operational performance of the businesses doing exceptionally well, however, from being a high priced environment, the investment that we’ve done has rerated because now everybody wants to do healthcare and technology and resilient sustainable business model. So we have been fortunate not only to have an operationally well-performing portfolio but something that is also been rerated from a relations perspective.

Ross Butler (31:20):

Fantastic.

Mirja Lehmer-Brown (31:21):

And a bit of luck is not bad.

Ross Butler (31:24):

What are the circumstances that you think are legitimate and would attract you to a GP led and what would turn you off?

Mirja Lehmer-Brown (31:32):

It’s evolved initially the, GP leads were for assets. Maybe they hadn’t gone that well and maybe needed a little bit. They still, so the GP believed in that asset, in the value creation of it, but it had taken longer. So that was a position, I mean, necessarily not a weakness, but it wasn’t a strength. And that has evolved what people now are focusing are really trophy assets, assets that are significant winners and with the pricing environment and additional competition, that are now out there, it’s really hard to find really good businesses. So if you have built a great relationship or maybe even changed and put them place a phenomenal management team in a very resilient business, but the underlying structure of a private equity fund is such that after a period of time, you need to liquidate it, you can argue. So why would I sell this to a larger fund for them to create more value?

Mirja Lehmer-Brown (32:41):

When I got hold of this company helped build this to better business, and my LPs can continue to be the beneficiaries of this good returned. So we think creativity is positive. It’s giving GPs more optionality in a market where it’s hard to find those assets. It’s not like every asset in a fund is of that exceptional quality that we are looking for, so that you de-risk it, from buying him to the next three to five years, you know, making a new plan and, and a feeling that this is a good thing to keep that business. I guess it’s linked to, if you look at the public markets, I don’t know the exact statistics, but a significant percentage of the increased market value or the value creation is actually linked to a very small group of companies. So again, the significant winners tend to be the one that continues to drive premium value creation. And those are the ones people tend to want to want to get hold on to. And with that, it needs to be high-quality process clearly, cause there can be conflict in that decision, but it also needs to be alignment. So you can’t just do it because you want to increase a UM you need to also align yourself also with your own, the GP capital, and behave as a buyer and a seller in that situation.

Ross Butler (34:21):

And do you normally, have to partner with other providers, or do you do the GP secondary on a solitary basis?

Mirja lehmer-Brown (34:28):

So depending on size, we tend to invest 20 to 15 million in an investment, either be the fund or a situation. So we have had a number of situations from these discussions going out, speaking to the GP community where we have been in a bilateral discussion to two LPs, if you will, into a situation. Cause we don’t want to be midority. We are minority investors if you will. An LP minority investors to then the largest situations where it’s more a larger group, you know, from five to 10 different investors into that asset.

Ross Butler (35:13):

And you said you’re seeing quite a few of these opportunities out there probably because things are becoming so polarized.

Mirja Lehmer-Brown (35:20):

Yes, it continued to go, we say, you know, let’s see right now it’s math, it’s the fastest-growing part of the second dairy market. No question. And there are a number of opportunities. So I think this will go on certainly for the next two to three years, but there’s always something else that happened. It could be one or two of them that maybe don’t perform that well, but you can also see a lot of people are hiring. A lot of different companies are hiring to address the growth in this market. So whilst it’s certainly going to grow for the next few years, I do believe some people are certainly banking on it growing for a long period of time ahead, but we don’t need it because we have other opportunities to, to invest in as far.

Ross Butler  (36:13):

In terms of how your team, your business, as it was sits within Hayfin, sits within the culture, but also the strategy and any kind of cross-fertilization of ideas and opportunities. How does that work?

Mirja lehmer-Brown  (36:29):

You know, initially again, more experienced people, more pattern recognition, and in different fields, that can be a value add. So just the fact that we know, GPs, where also from the credit side, they might lend into businesses is intelligence people, intelligence networks are always helpful, different angles based on different experiences. And that’s been very easy. It’s very easy because it’s easy to, to me, you need to be careful about some of the walls. So it’s, you don’t share detailed information, but quality of people or whether they got experienced or not in that type of field is something from the PE side that can be helpful. We came with much more of ESG processes because it started earlier on the equity side in Europe than on the credit side. So we work very closely together. You know, the PE team has been able to do ESG profiles of when the credit side work with P houses, we are involved from an ESG perspective from a profiling point of view, rather than they do the deal clearly kind of ESD analysis themselves.

Mirja lehmer-Brown (37:49):

So it’s very beneficial what we’ve now started to do. And that’s even more exciting, is we can make investments together back into what we’ve said instead of staying in silos. We have now two recent deals where we work together with the special opportunities side in creating a capital solutions for AGP into an investment where there’s a peak element and an equity element. And they are not that many of our competitors that actually can stitch together tailored solutions across credit and equity for a situation which, we are about to do our second now and I just expect that to continue. So that then start to, you know, even deeper working together across the teams and then the practice based on this team-based, culture in that, we are, we are super happy if we can work together and create solutions.

Ross Butler  (38:53):

So it’s an equity co-invest with a credit element attached to it, all from the same provider. And how does your decision-making process in terms of governance work and how does it align with the rest of Hayfin?

Mirja Lehmer-Brown (39:08):

So we have our own investment committee. So, you know, the private equity investment committee contains about the senior members of our team and senior members of Hayfin and the special opportunities have a different investment committee clearly. There are some joint members and the learnings from one will apply to the other, but it’s also the focus. Again, the credit focus is different. The type of analysis is somewhat different, different from depending on what angle you come from. Yeah. And, something that was super beneficial was coming into this, COVID, working together was actually, we have a tremendous high yield and syndicated loans team, which are operating in the liquid markets. And with that, a higher degree of macro focus, that goes into their analysis. So coming into COVID, nobody, we’ve experienced the financial crisis, but not this a health crisis members, senior members from the whole firm working together, trying to figure out what is this, is it temporarily or is it something that we’re going to go into. A lot of people are going to die for a long time and it’s going to be a very different type of situation. So Gina Germano and her team had lots of phenomenon analysis that was very helpful in creating scenarios, right?

Mirja lehmer-Brown (40:44):

Where do we think we’re going scenario setting that was helpful for all of us. And as a group, as a house, we then come up with a scenario that we used as a base case and, every week or so we were assessing, is these the data points that are coming? Is this a valid scenario? And I think that allowed us also in 2020, where a lot of people, at least up until after the summer did not deploy that much. We were able guided by facts and scenarios and analysis working together. Our conclusion was that we can deploy. And we had a record year in 2020, across the board deploying in our different, product areas based on his intelligence and views of working together.

Ross Butler (41:36):

Did the private equity industry is a little bit slow at deploying during, during 2020, but, I mean, it’s a very difficult time because the economic situation has never looked more uncertain. I personally, I think, it still looks incredibly uncertain, and most private equity firms don’t have a chief economist. They don’t tend to even worry about the macro view in my experience so much, they take a view on people, but in a situation of radical uncertainty, perhaps they might need to take more of a view. I mean, I’d be, I’m sure it’s all trade secrets, but I’d be fascinated to know in general terms, what your outlook is with regards to the economic prospects of Europe.

Mirja Lehmer-Brown (42:18):

And I think you’re absolutely right. I think there are all sorts of elements that go into kind of the analysis of what you do. And I do think some of the larger houses definitely apply and have asset allocators based on more the macro, the research macro judgment helping in selecting the underlying businesses. And, you know, we are with that, you know, low growth, uh, for sure in general is something that we think will be here. We had the health crisis currently the aftermath of that is energy issues, supply chain issues, and still too much liquidity into the system. So whilst, you know, over the next little while is, seems like it’s still catch-up effects in a positive sense that are trending. There are certainly clouds out there that could lead them to volatility.

Mirja Lehmer-Brown (43:18):

So I think volatility, in general, is here to say, that’s why with the math typically trying to focus on thematic sectors, which have then growth. So megatrends that, that provide tailwinds. And that’s also LinkedIn. So initially when we said we’re focusing on healthcare and technology, it was more around the fact that we liked that pattern recognition. We liked the defensibility of it in preparation for a correction, but as we evolve and the content constantly need to reassess what we do, we’ve come to think because of the volatility and because in general, lower growth in Europe, if we focus on an aging population, if we focus on digitalization, those are longer-lasting trends that are structural, and we’ll continue to see growth, even if lot of other areas will temporarily go down in a volatility in order downwards adjusted scenario.

Ross Butler (44:24):

In terms of your, your own, section within Hayfin, what does the future hold in terms of growth? And do you have a growth strategy? Is it to just gradually increase your number of relationships or would you consider introducing, I’m not sure of the exact term for it, but the new sources of funds or even grow by acquisition of competitors.

Mirja Lehmer-Brown (44:47):

So, I think we were all growth-minded. So in order to continue to evolve, there needs to be some growth. And with that, we’re having a number of conversations with other similar parties, similar to BCI. So we will grow somewhat by adding, a more diversified investor base, but still though, and that’s very similar, across, Hayfin we do believe in being disciplined, you need to grow. That’s a positive for any organization also for the younger generation coming through. You need to show growth, but not for the sake of it. So disciplined growth. We still believe in ensuring that the right balance in how much you wanted the blot and that’s what’s leading us to the amount of capital we’ll take on. The strategy it’s scalable, particularly on a GP led or some of the co-invest we could have, instead of doing the 20 to 50 million, we could easily have invested a hundred million in several of those situations and the same goal with the fund, but not necessarily 500 million. So ask the market evolves, we will evolve with it, but we will stay on the discipline side because the discipline is also the guiding light that will allow us to act before.

Ross Butler (46:25):

Great. Well, the very best of luck with it, Mirja, it’s been really nice hearing about your startup story, I guess.

Mirja Lehmer-Brown (46:32):

Thank you very much for having me, my pleasure.

Ross Butler (46:36):

You’ve been listening to the Fund Shack podcast, make sure you subscribe and visit our website at fund-shack.com for many more video interviews. It’s the private capital channel for alternative investment professionals. Thanks for listening.

#29 Luke Johnson, entrepreneur, investor, philanthropist

Fund Shack
Fund Shack
#29 Luke Johnson, entrepreneur, investor, philanthropist







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In his 20s, Luke Johnson led the acquisition of Pizza Express and as chairman, helped it become the UK’s leading pizza brand. He has since established and helped develop household names, Strada, Giraffe, the Ivy, Zoggs and Integrated Dental Holdings, as part of his family office vehicle, Risk Capital Partners.

He is a successful newspaper columnist, author, former chairman of the Royal Society of Arts, and current Chairman of The Institute of Cancer Research.

In our exclusive podcast, Luke provides a critique of private equity, a critique of public markets, a critique of lockdowns and some of the most sensible advice we’ve heard yet about how businesses should be run in this brave new world.

Uncorrected transcript\some inaudible parts

Ross Butler:

You’re listening to a Fund Shack, private chat number 29. Welcome to Fund Shack. I’m Ross Butler, and today I’m here with Luke Johnson, a well known entrepreneur, businessman, philanthropist, and private investor, Luke. Welcome. And I have to say thanks so much for coming to meet us physically, because this is the first time we’ve been back in the studio 18 months and personally I think it makes a real difference. Nice to see. I was looking over your bio in preparation for this. And I had to say, and I don’t say this just a flatter you, but I was amazed at the breadth of your undertakings and your achievements. So you’ve got obviously a varied portfolio. And within that I recognized about three quarters of the businesses. Now you do consumers, so maybe that’s not so surprising, but that leap out of me, then you’ve been a successful newspaper columnist over years, if not decades. And I know that that’s not easy to sustain and you’ve been very active on the philanthropic side. You’ve publish books. This is quite a productive repertoire. Now you only get one life, so it obviously doesn’t seem strange to you, but why do you think it is that you’ve managed to be so productive across so many relatively varied domains?

Luke Johnson:

Well, I think I’ve always liked to be busy and I have a father who has had an extremely long career and although he stuck to the one career of being a writer, a journalist and a historian, he, he was incredibly productive and wrote many, many millions of words and published 40 books and so forth. So I think he gave me a good example to follow as a role model. And you know, to a degree, I think life is what you make of it. And if you have the energy, there are always opportunities. I think given that most of us perhaps we’ll live to, you know, be in our eighties. That means we might well have a 50 year working career. And it seems to me, therefore that we should all plan to have at least two different careers and possibly more I’ve always been interested in people who’ve done a variety of things rather than just one profession and stuck to that their whole working life and then retired. None of that interests me in the slightest.

Ross Butler:

It rather goes against the grain these days, cause everyone wants to specialize to such a great degree. And if you’re seen to be your specialist in more than one area you’re seen as an amateur in at least one of those,

Luke Johnson:

Well, there may be some truth in there. And I think I could be accused of being a [INAUDIBLE] at some things in life. And you know, I don’t deny that if you diversify, then you may have less depth and you know, there are advantages to focus and specialization, particularly in the modern complicated world. However, the point you made at the beginning is we only have one life. It’s important to keep interested and lively. I think for example, take philanthropy. I’ve served on the boards of a number of different charities and nonprofits over the last few decades. And one of the great advantages of that is I think it teaches you things and you meet people that if you are only doing business, you wouldn’t. So I would actually encourage all successful people in sectors like private equity or venture capital to seriously consider whatever age, but say in their forties, the idea of becoming a trustee of a school or hospital or some other nonprofit, because I think it broadens your horizons. And that should be partly what life’s about. I think there is a risk if you only do one thing, you get dull and you repeat yourself and the needs to be more to it than that. I think.

Ross Butler:

Yeah. investing itself is very nature. Kind of it’s, you’ve gotta have a broad outlook on life because you know, you’re looking at different sectors. You are not the specialist, you’re not the, in most cases, the executive, the doer, you’ve gotta stand above that. So that will kind of make that, that probably adds to your ability to be a successful investor.

Luke Johnson:

Maybe I think one of the challenges for private equity is that although they pretend to themselves, they aren’t the specialist in terms of how to run a business or a particular industry. I’ve sat on boards with private executives who are there telling the managers how to run the business and making decisions that I think should be delegated to the executives who are full-time in that business. And the arrogance sometimes are private equity executives in thinking they know best let’s them down. I think there are some areas where private very good, you know, buying and selling for example, raising finance, they’re pretty good at that. Some of them are pretty good at picking talent but above and beyond that, you know, knowing markets, knowing competitors, you know, understanding the intricacies of the technologies that they’re working with, really being able to spot the best executives at the operational level to work with. Mm not so sure

Ross Butler:

I’m sure you’re right. And I actually, I think I do agree with you, but to play devil’s advocate slightly, if it didn’t work, would they, would they do it? It’s certainly the trend is for greater activism and certainly the institutional investment community buys the idea of interventionists private equity firms. So presumably they look at the data and think, well, those that are a bit more muscular in their approach with executives do better. There must be some cause in effect,

Luke Johnson:

There probably is if they’re the right private equity firm and as you well know, you know, it depends which quartile of a PE house you are talking about. I think we’re all humans and I think private equity investors have as much ego as anyone. And, you know, according to Maslow’s hierarchy of human needs, once they’ve developed a certain quantity of wealth what’s next, and obviously what’s next is some degree of status. And that would mean them adding value and making a difference and being important in the ownership so that the value accretion is partly thanks to them. Now, I would normally accept that the financial engineering aspects of deals are probably down to the PE house. I have they bought it on a low, multiple, can they sell it on a high, multiple, have they added the right amount of lever to goose the returns?

Luke Johnson:

Have they made a clever bet in the first place? All those things of course are down to them, but, above and beyond that, you know, quite often I think, you know, it’s debatable whether they really make a difference. Now, I think there are some very good private equity investors. And I, I would say on average, you know, successful private equity investors are clever people. And, you know, obviously if they succeed and they, you know, get backing from limited partners and, and show good returns, then they can’t be that thick. However, it’s amazing what lever in a rising market can do.

Luke Johnson:

And, you know, generally speaking over the last two decades, certainly, you know, it’s been a pretty good game to play. I would say private equity in terms of accumulating returns for investors and indeed enriching private equity investors. I think, and I’m not talking about myself so much, cause I’m not really an institutional private equity investor or executive, but I think it’s as good a career as one could pursue, if, you know, you want to get rich in a pretty safe way because you are playing with other people’s money to a very large degree and you know, you can write very big checks. And so if you get your bets right, then you do extremely well. And to a large degree you know heads say wind tails, other people lose. So, you know, private equity as a career has proved a pretty good bet. And I suspect it will continue some time because you know, there are a lot of organizations raising big funds and there’s a lot of parcelling which to a degree, you know, is self-fulfilling

Ross Butler:

So, you’ve packaged yourself up to some degree as one of those people, because yes, you are not an institutional, but you’ve got risk capital partners. You could have just been Luke Johnson, the big wealthy investor, but for some reason you see it as useful to be seen as part of that community.

Luke Johnson:

Well, I think probably a lot of people prefer to deal with a brand, an organization rather than an individual. I think an individual is more egotistical inevitably. I think when we set up risk capital partners over 20 years ago the sort of private office was much less common, I guess, if one were doing it now, you know, that’s what I would do. Also. I have more money now than I had 20 years ago. In the meantime, we also did raise a fund with limited partners. And you know, it’s say for one, an investment is now spent and we’re returning funds and it will show a good return to our LPs. And I think it’s been a success, but I didn’t wanna do another one. The point about a fund of course, is it’s a very, very long term commitment.

Luke Johnson:

It’s really a 10 year commitment from all the partners. And indeed obviously the limited partners. So it’s a very unusual structure in terms of most jobs, if you like. And, and it, it really is a partnership arrangement rather than employment arrangement and all the longevity and loyalty required that, that displays. And indeed, I think if you look at the history of most PE houses that have fallen apart more often than not, I would say it’s cause the partners fell out, you know, and that may have been because they made some bad investments, but quite often it’s literally personality clashes leading to the, you know, founding partners of the organization, not getting on etc. And that’s what leads the LPs to then dessert them. But I’m not in denial about the fact it’s a lucrative and on some levels successful structuring of buying assets, because I think there will always be the advantage they have over say, public companies in private equity are virtually, always willing to buy and sell.

Luke Johnson:

Every asset is for sale. And they are always willing to buy a new asset. Public companies are slaves to the cycles of the stock market. And very often in my experience, public companies are forced to sell at the bottom and buy at the top. And it astounds me how often I come across situations where there’s a public company in a particular sector that will know that industry very well and have huge synergistic advantages of making a strategic acquisition, but for a variety of reasons, they’re too slow or it’s at the bottom of the market or whatever. They can’t make the acquisition private equity, which doesn’t know the industry as well. And doesn’t have any synergistic benefits makes the acquisition and then flips it to the industrial buyer a few years later at a huge profit. And, you know, you wonder why does the public market always end up paying more? And I guess it’s because private equity are ultimately really M [INAUDIBLE] specialists, all they do is buy and sell in a sense. And that’s what they focus on. They’re small and flexible and they have this great timing advantage, which really plays to their strength.

Ross Butler:

I agree with you. I think it’s it’s one of those things and there isn’t a problem with it. As long as the, those rewards are accessible to as many people as possible. One of the problems is that anyone can invest in the public markets, but it’s, it’s increasingly easy to invest in private equity vehicles, but it’s still pretty difficult for your average job.

Luke Johnson:

Yeah. And of course, as we know, private equity still only represents a tiny proportion of the overall savings and pensions money out there. And as a proportion of overall institutional individual portfolios, it is growing, but it’s still, I would imagine worldwide, you know, under 10% across most diversified forms of savings. And it, it is gonna grow structurally more allocation is gonna be devoted towards private investments once or another, be it VC or PE. That’s probably a good thing. I’m not surprised even though, you know, two and 20 relative to public market management fees is I, the level of attention required investing in private companies is a great deal, more intense. So, you know, I would argue it’s, it’s justified to an extent and the returns are there. And another area where I think private markets have an advantage is they are more willing to put higher levels of debt into investments. Generally, my experience public company fund managers, don’t generally like to invest in companies that have 3, 4, 5 turns of [INAUDIBLE], senior debt. Whereas many PE houses are perfectly comfortable with that. Indeed. They would consider that a standard lever of leverage for a normal buyout. So, you know, that financial engineering in rising markets and growing businesses, compounds returns. Yeah. And  it’s an another advantage that PE has over public markets. So

Ross Butler:

Just at this point, can we step back to some of our international listeners might be wondering where have you come from, if you are not a mainstream private equity guy, could you give us a quick potted history, maybe looking, starting with, well, wherever you like, but particularly like Peter express as a signature deal.

Luke Johnson:

Sure. Okay. So in my late twenties I, and a, a group of partners took control of a private business called pizza express. We merged it with a a group of franchise restaurants, pizza expresses, arguably the leading pizza chain in the UK. It’s been going since 1965. We took control of that in 62, 63. We took it public.

Ross Butler:

Wasn’t it ’82?

Luke Johnson:

No, ’92, ‘93.

Ross Butler:

Sorry. Okay. Sorry,

Luke Johnson:

Go. I’d only just graduated from university in ‘82.

Ross Butler:

You said ‘62, so yeah, you’re Right.

Luke Johnson:

Yeah. ’65. It was founded. ’92, ’93 we took control of it. We took it public, and it was very successful. And I was chairman of that during the nineties and, the chairs rose from 40p to eight pounds more. And, off the back of that, I then started doing more deals. It initially mainly public company deals. And then through the later nineties and into the two thousands, many more private companies, and, you know, over the decades, I’ve probably invested as principle in 50 or more businesses with a strong bias, as you said, towards consumer and in particular areas like, hospitality and leisure, mainly UK. And you know, at the smaller end, I, I would characterize the classic investment I do as development capital. That’s my preference.

Luke Johnson:

So frequently backing a founder not always taking a majority stake, quite often, a minority stake. Yes, we do buyouts, but quite often, not and pretty flexible in terms of the types of deals we do in the structures. And I think that’s because to a fair degree, most of the time we’ve been using our own money, my money. And so we can do bigger and smaller deals. We can do longer deals. And clearly we don’t have to do any deals at all. I think one of the reasons I chose not to raise a fund when our last one was exhausted was, as I say, it’s a 10 year commitment. I’m 60 next year. And I didn’t wanna be marching into my sixties with a sort of, you know, seven, eight year commitment still to go of making, you know, a minimum number of investments and a minimum amount of capital deployed every year.

Luke Johnson:

And it’s been very interesting to me over the last 18 month, with the pandemic, a lot of private equity houses, particularly in 2020 sat on their hands grave mistake. I think they should have been out there doing deals. And you know, a lot of them were underinvested. Anyhow, they had a great deal of dry powder. They’re now even more under invested and they under are under huge you to invest. And, you know, ultimately a P house that doesn’t get money to work is no good to anyone. Mm. So they will get their money to work. Unfortunately they may well end up paying too much. Now, usually private act is pretty good at avoiding those sort of cycles, as I said earlier, and, you know, they’re astute people, private act invest. So they’re very reluctant to overpay, but I sense that quite a lot of houses have got their back slightly up against the wall in terms of the pace of investing. And that’s not a comfortable place to be. And I’d much rather be in a situation where you take a year off. Things are too pricey. Conditions are too difficult. I won’t be investing this year. And then do twice your usual number of investments when times are good for investing.

Ross Butler:

Yeah. So you have that flexibility, which is an advantage. We come back to maybe the structural advantages, but you mentioned you were active in 2020. I mean, what’s your view of the market and opportunities out there?

Luke Johnson:

Well, I’m very much to niche investor. So, you know, I’m not putting a hundred million to work a go or 200 million, whatever it might be, you know, I’m investing five, 10, 15 million pounds in each bet. And I think in the end of the market that I tend to operate in, there are opportunities two or three of the deals I’ve done in the recent past have been distress. And there’s obviously some of that going on, particularly in some of the sectors I’m familiar with. And those are deals that the vast majority of private equity houses are not geared up to do. Don’t feel comfortable doing for all sorts of probably good reasons.

Ross Butler:

Um there’s not much experience of doing distress deals.

Luke Johnson:

No. I mean, there’re obviously a handful of specialists that only do them and some of them are very good and really I’m really impressed by the quality of some of those deal doers.

Luke Johnson:

But they tend to focus only on that. Again, they would tend to be doing slightly bigger deals than me. And some of the deals I’ve done over the recent past has been modest if any competition, which, you know, for most private equity players is very hard to achieve. You know, generally speaking, every single deal is got proper advisors and intermediaries and is well marketed. And you know, the, the assets touted widely around the market and there’s plenty of competition and you get a, not a perfect market, but a pretty good market price achieved for most assets of quality and, and size. Mm.

Ross Butler:

Would you say that so I’m just trying to get to grips with what the secret of your success is. Would obviously you can’t put on a, on a napkin, but I’m wondering if to what degree would you say you use your intuition when you are assessing whether something is a good opportunity versus bringing in the advisors and producing reports for, you know, like, so a typical investment executive would then have to go to an investment committee and it would be a group decision, but it would also be a real discipline in terms of dotting all the eyes and crossing the Ts and making sure that there is a really explainable, calculable case. You don’t have to do that. So you can rely more on your intuition, to what extent do you?

Luke Johnson:

Well, I think having the discipline and having group input is vital. And you know, there have been occasions in the past where I have not been as rigorous as I should have been, not within our fund, but with my own money. And sometimes it’s blown up in my face and I, you know, I’ve tended always to be at the sort of higher risk, higher reward end of investing. So, you know, I’m much less interested in steady investments that will, you know, gradually make me twice my money. I’d prefer to go for things that make me three or four times my money, but occasionally go wrong and you lose everything. And obviously that’s highly undesirable and never part of the plan, but it can happen in life. It, it normally it doesn’t actually happen with deals. I do because of leverage it’s because the business hasn’t worked.

Luke Johnson:

I do use intuition and inevitably we are, you know, social animals who you mentioned at the beginning of this meeting, how much better it was face to face than on zoom. I completely agree. That’s all about what you might call intuition and being a human being I think private equity investors who pretend to themselves that it’s all science and spreadsheets are under an illusion. Hmm. I suspect none of them do actually think that because otherwise they wouldn’t be successful. No, I think having checks and balances is essential and they come in all shapes and sizes, not just credit committee, but of course, lenders and others will have their own, you know, impositions, I think relying exclusively on, you know, the accountants and lawyers and other specialist advisors to tell you all about the business, rather than doing any of your own personal due diligence.

Luke Johnson:

And having at least some in-house capacity of taking a commercial view on a situation and the people running it and so forth is a mistake. And you know, I have to say having worked with some bigger PE houses, some of them are very good at all that both having in-house resource, but also getting incredible work from advisors. So I wouldn’t to cry any of that at all. I think it’s important not to bely obsessed about the reports. I think you have to look at the big picture. You, you almost certainly, at some point have to take a view. I think sometimes, you know, I’ve seen PE houses miss a deal because they let relatively small issues cloud the thing, and someone else is more willing to step back and say, you know what, nothing’s perfect, good enough. I like it, etc. And it’s the right price and so forth.

Ross Butler:

Um you mean, a bias towards optimism to some degree?

Luke Johnson:

I think anyone in capitalism does. Yes. You know, if you don’t believe in growth and you don’t believe in a positive future, and you don’t believe in the potential of the business, you are backing to deliver value, then you probably shouldn’t be taking money on it. So yes, and I think probably ultimately most PE houses have that frame of mind or the individuals working in them. And so they should and obviously, you know, as well as making a turn on the multiple and the magic of leverage, the other biggest element in any private equity successful investment is growth. That’s the thing that will ultimately deliver the really great return growth. And indeed, it’s also what the buyer at the other end looks for. You know, I have occasionally invested in businesses that have very little, if any growth and they’re quite hard to sell because, you know, people don’t want to really invest much in stagnant businesses. And why would they, you worry that if he’s not going forward, he’s probably going backwards.

Ross Butler:

Yeah. You alluded to the fact earlier that you invest in relatively small deals and so they can be the specific situations that you’re assessing, but particularly I’d say at the moment, is it not increasingly important to take a more of a macro view as well, given the interventionism, let’s say of the state in various sectors are you having to, are you trying to factor that in, when you look at new businesses in areas that could be locked down?

Luke Johnson:

Well, it’s a very serious point and pretty profound for anyone who’s involved in markets and free enterprise and so forth, you know, have the rules of the game change such that the government will force you to shut in a way that would never in modern history of happened before and, you know, destroy the value you are trying to create here. I’m sort of without being ostrich like about it, I’m of the view that these are things one cannot influence, and generally, therefore you can, you know, give yourself a hashtag stressing about them all night long. I think you have to try and focus on your own specifics of situations where you can make a difference both in your own life and your business. And I guess I’m taking a view generally that, you know, with regards to, for example, lockdowns, which have been impacted certain sectors, like travel very severely indeed, ultimately society can’t afford many of these more.

Luke Johnson:

They’re just too expensive, both economically, psychologically socially. And so you know, the harms, the undoubted damage of lockdowns are becoming ever more apparent as was obvious because they’re diverse and long term, whereas of course, daily hospitalizations of and deaths from COVID to, you know, on a daily basis. But you know, governments can’t keep printing money. I don’t think in the way they have done to pay the bills. And you know, some of the bills for both businesses and governments are starting to fool you we’ve got threats like inflation. So and so on. So big picture means I don’t think, you know, countries like the UK and many others can really afford to do many long lockdowns let alone the fact that I think proof will recently show they don’t make much difference. So they really aren’t worth it, both health wise and wellbeing as well as economically.

Luke Johnson:

And therefore I think, you know, it’s probably a pretty good time to take a view and say obviously to a large degree, thanks to vaccines, but also the, the terrible costs of the interventions are such that they cannot be repeated again and again. And so as people keep saying, we have to live with the endemic disease and get on with work and, you know, start earning some money to pay the bills, which means decent businesses that might be shut down. If there were another lockdown are probably a reasonable bet, but there’s gotta be a discount somewhere in there. And, you know, clearly if once constructing portfolio, you don’t want to bet exclusively on businesses that are vulnerable to being shut down. And I know one or two PE houses where, you know, big chunks of their portfolio have been closed for much the last 18 months. I’m very lucky and is absolutely luck that I’d sold a whole raft of businesses over the previous couple of years, which would’ve been smashed to pieces by lockdowns. And thank God I did, because it meant that although I did have certainly a couple of businesses that are, you know, in sort of recovery mode, we say having been severely battered if I’d had a half a dozen of them, it would’ve been significantly worse.

Ross Butler:

Yeah. I think you’ve gotta be right to just focus on what you can influence. And yeah, I do find it surprising that there’s so little commentary on the potential fallouts, like economists used to issue, press releases. If we had a public holiday telling us how much it costs the British economy, and yet we’ve been impartial lockdown for two years and well, they don’t issue, press releases about it generally. It’s like, it’ll be all right. We’ll just go along as, as if nothing ever happened. So I think, I think you’re right. You have to just focus on what you can, what you can influence, but there probably will be a reckoning.

Luke Johnson:

Well, I think there needs to be reckoning because I think overall it can be argued that, you know, in certain ways society slightly lost its marbles over the last 18 months. I think the toll across many aspects of communities in terms of, for example, children and education, young people, generally, the damage to them the irrationality and lack of evidence base for some of the interventions and so forth and so on. You know, we don’t want to get distracted into that black hole. I is such that you know, in hindsight, in the years to come, I do think we will realize that grave mistakes have been made and I’m not talking about, you know, locking down two weeks too late. I’m talking about the very essence of universal lockdowns and the harms of, you know, unemployment and you know, the, the divisions it creates in society between those who have to still go out to work.

Luke Johnson:

And those who think that everything now is working from home for forever speaking personally, one of the toughest aspects has been, people thinking in a rational way when they’re all isolated. Yes. And I think for myself, and I believe for many others that actually you get things more right if you are debating it with others in person. Mm. And I think the idea that we’re all thinking rationally because we’re on zoom calls is diluted. I think there are very profound differences. I know for myself, I’ve had hundreds of zoom board meetings and such like, and I can tell you now they are very, very dysfunction compared to a proper board meeting with people in the room. Definitely no question of it. And for example, if you’ve got a large board and most large organizations and institutions have large boards, there is a massive predisposition towards people, not dissenting of any kind, when there’s a certain number, people on a zoom call, they are much more likely to stick their hand up or nod to the chair or do whatever it is to say, yes.

Luke Johnson:

I just wanted to bring up this one point. Can I just question this it’s extraordinary, how often a non-executive argument will do that and then two or three others will say yes, yes. I was wondering about that does not happen on zoom calls. Yeah. And you look at our leadership and the key advisor groups, for example, you know, in public health and others that have been making these draconian and extraordinary decisions all on zoom, not good debate, not good vigorous discussion of what are the, you know cost benefits of this. Have we thought of the whole picture here? Mm. And I think that’s been going on a great deal. And I think because we’re all snug at home, particularly those better off powerful people who run society in industries like private equity. The fact that, for example, you said at the beginning of this meeting, this is the first time I’ve had one of these interviews for 18 months. I can’t tell you how many conversations I’ve had like that, because I’ve been in my office and meeting people if I possibly can since May last year. Right. But every banker, every accountant, virtually every institutional person I know of fund manager, PE executive has been at home the whole time. And I don’t think that’s conducive to critical thinking. And

Ross Butler:

It’s so easy to say, well, what’s more efficient, you know, everything

Luke Johnson:

It’s convenience. Yeah. Convenience. Yes. You’re right. Efficiency is the wrong word because efficiency suggests getting it right. It’s convenient. It’s a bit like getting home delivered food. It’s very convenient, but mostly eats. I’d rather eat in a restaurant or have proper cooked food at home after you’ve done some shopping, then a crappy meal that is probably more expensive home delivered.

Ross Butler:

And yet it’s harder to articulate the benefits cause they’re slightly intangible and they they’re harder to, to put hard quantification on. And you also kind of alluded to the, everyone talks about quality these days, but there is a real inequality element to this whereby white collar workers like you and I could choose just never leave our homes again.

Luke Johnson:

Ft and economist readers love it all. Yeah. Because they run the world and they’re very comfy. They’ve got gardens. Someone collects the rubbish. Someone delivers their food. They, you know, get stuff on Amazon. They might see more of their family. What’s not alike and they’re safe. Meantime every year, every day in Britain, 10 million people are having to go out to work, to keep the broadband going and to deliver the groceries and so forth. And that is a more pronounced inequality on many levels than I think ever in our lifetimes. And you know, there are so many serious issues arise from this such a for example, has furlough undermined a chunk of the portions of the nation’s work ethic, you know, and it’s peak 9 million people being paid to stay at home. Why wouldn’t they want that to continue? Is the real reason people are willing to accept low quality output from working from home because it’s saving the money on commuting. I think that’s a big factor as to why lockdowns have had such enormous support seemingly. It’s not the science it’s because people are saving money on their fairs.

Ross Butler:

What’s your policy preference with regards to the companies that you own?

Luke Johnson:

Well, I want them in the office now it’s obviously up individual bosses. I would say, you know, if they think they can run things efficiently and you know, it makes more sense for their particular shape of their workforce to do it at least partly from home a hybrid model, flexible. I get it. And I think workforces these days will increasingly demand that and companies that insist everyone is in the office every day may struggle to recruit or retain people.

Ross Butler:

Although young people might find it more attractive.

Luke Johnson:

Of course. And I know I do. And I think there are, it depends on the big and the industry and the people in the work. UI guess people in my generation are much more likely to say, we’ve all gotta be in the room. Those who are, you know, much more used to the flexibility, should we say video conferencing might argue, no, let’s stick to what we’re doing now. And of course there are lots of things that can be done perfectly competently online rather than in person, but when it comes to anything critical, a key pitch or, a key sale or, interviewing someone to hire them or whatever it might be that really matters, then I see there is no substitute for doing it in the room. And, h passionately believe that. And I think actually it has been a competitive advantage, I believe over the last year in doing stuff that I am in the room when people are willing to be. And, h think it’s helped clench deals and given me an insight that people who are relying exclusively on zoom, you know, I’ve missed.

Ross Butler:

So the Woody Allen quote, which I’m gonna get wrong, but two thirds of success is showing up

Luke Johnson:

90%.

Ross Butler:

We’ll go with that. Leave us with something optimistic, positive. Can you tell us about deal you’ve got in your portfolio, you like the look of, or something about the world that you are optimistic about?

Luke Johnson:

Well to use that bogus venture capital phrase pivot, I have slightly towards areas that are more digital inevitably because historically, you know, I’ve invested heavily in areas like retail and hospitality, which means, you know, shops and restaurants and cafes in pubs and hotels. And of course, all of those, you know, have struggled over the last 80 months and face challenges going forward. So I would still invest in all of those sectors, but I’ve also made an e-commerce investment last year into a gardening products business it’s called Primrose. And that has an October year end, but we think it’s gonna deliver for this year’s results because it’s had the principal season now and we’re happy with that purchase. We bought it almost a year ago now. And I think it’s a good sector. And I think eCommerce in that space is growing gardening itself has boomed during lockdowns. And I think some of that will stick. And we are looking at further eCommerce investment because obviously it’s gonna take an increasing part of the market in terms of people’s overall retail spend. So

Ross Butler:

What’s primroses model. Do, do you have to go onto their website to buy their stuff or do they start.

Luke Johnson:

Yeah. I mean, you know, they have an app and so forth too, but mostly people are on the website and, you know, it’s, it’s exclusively, it’s not an omnichannel, so it doesn’t have any retail outlets at all. It only it’s, you know, only digital, and it’s quite long established business. And, it’s quite a fragmented sector. Actually. There are quite a number of digital players in, the overall gardening space. You know, it’s a sector that we stumbled across, but we like, and, I think there’s more to go for. So, yeah, I would say that was, a deal that we’re excited about and we think has, has lots of potential. And, and so inevitably, you know, if you look at e-commerce generally, you know, you are up against Amazon, but there are some sectors that they are perhaps less focused on. And I think gardening, you know, has some logistical challenges, gardening, for example, that Amazon seem less interested in. Right. And they’re such dominant player, ideally, you know, you don’t wanna be directly competing with them. Mm. We do work them actually as most people do in e-commerce, but, ideally you get people on your own website. Yes. And so yeah, that’s one business we’ve bought recently that, we think is interesting.

Ross Butler:

Great Luke. Well, it’s been great catching up with you in person. Thanks very much for sparing your time.

Luke Johnson:

Thank you.

Ross Butler:

You’ve been listening to the fund shack podcast, make sure you subscribe and visit our website@fundshack.com for many more video interviews. It’s the private capital channel for alternative investment professionals. Thanks for listening.

Alistair Lester, CEO of Aon M&A on protecting and enhancing returns

Fund Shack
Fund Shack
Alistair Lester, CEO of Aon M&A on protecting and enhancing returns
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Alistair Lester is CEO of Aon’s M&A and transactions services business in EMEA. This is not the conversation you think. Aon has spent recent years building out its capabilities across the risk spectrum.

Or watch the video version here.

 

Transcript

Ross Butler:

Alistair, you are the CEO of Aon’s M&A business in EMEA, but it’s not your first bout there. You started in the graduate scheme some 25 years ago, and in the mid 90s working for private equity clients. And I wanted to start by asking you to what extent has the insurance services industry over that quite long timeframe responded to the pace of change in the world and the risks that businesses and private equity firms face today?

Alistair Lester:

There’s been a huge amount of change of course, in the world. The insurance industry is not renowned for being particularly speedy in terms of pace of change, but actually there’s been a pretty significant amount of change within the insurance industry and particularly within the part of the insurance industry and the broader professional services aspects of our world that faces off to the M&A and private equity ecosystem. When I think back to being told that what we did for private equity firms was a niche part of our industry and a niche part of a firm that I previously worked for.

Alistair Lester:

I think we, as an industry, are really only just starting to embrace the scale of that relationship opportunity in the same way in the last three, four, five years, a couple of good examples of what’s really driven that Ross. If you go back two, three years, if I said to a PE firm, what do you think of Aon, Aon could do to help you? They might say, I know you, we talked to you on the limited partner side, you’ve got a big investment management arm of your business, and we talked to them about LP investments, or you are an LP in our fund or, or they might likely have said insurance due diligence. And they might’ve said something more recently, this warranty and indemnity insurance, or as we call it in the US, reps and warranties insurance product,  which has genuinely exploded in the last four to five years in utilization in PE.

Alistair Lester:

And yes,  we do all of those things, but what’s really exciting for us is our ability over the last few years as our industries evolve, and as Aon has evolved to bring multiple advisory capabilities, multiple advisory work streams to life on the one hand and multiple or an increased number of financially motivated insurance instruments to bear on the other hand and much more sophistication and science around how we really do develop, deliver value in the portfolio. So when you have that conversation now with clients who’ve been on that journey over the last three, four years, they would absolutely recognize our industry. And particularly our firm, I think, has been leading the charge in areas like cyber consulting, in intellectual property consulting and advisory and valuation, of course, in risk and assurance in the broad set of human capital from retirement benefits, but also talent reward and compensation aspects of deals.

Alistair Lester:

Then on the instrument side, looking at the adjacencies to warranty, and indemnity insurance like loan contingent risk insurance, be that tax insurance be that litigation insurance we’ve pioneered a product called judgment preservation insurance. We’ve pioneered the ability to wrap insurance around your intangible assets or intellectual property. You can potentially use those instruments as collateral, which enable you then to access different forms of financing. So really the big change has been this institutional-industrial realization there is an opportunity to marry up what has traditionally been seen as a relatively lazy, perhaps enormous pool of insurance capital with all the parts of the capital markets and bridge the two in a way that drives value into private equity deals, because as you and I both know, private equity are just so hungry for what they call new technology and new ideas, and that’s been a fantastic accelerator for what we do.

Ross Butler:

Why is AON providing the services that it is providing? What’s the journey from your insurance services capabilities to the services that you’ve currently  just outlined?

Alistair Lester:

The world lives in a world of risk, and Aon as a firm is all about risk. We are a risk business. Insurance is an instrument that can help clients manage their risk. But what we don’t do is just deliver insurance products. We also deliver a range of advisory capabilities that help clients understand, identify and mitigate risk insurance instruments are just one part of the mitigation aspects of how you deal with risk. Every deal that any client does, they price risk into their deal, and they deal with risk in a deal in different ways. Maybe they priced chips. Price chips are a result of people identifying risks they’re not comfortable with. Maybe they seek contractual recourse against the seller against the counterparty, and maybe that contractual recourse is somehow secured through escrows. Maybe, as a buyer, if I identify risk in a deal, I defer an element of the consideration to see if that risk crystallizes, and if it does, I’ve protected myself because I’m not having to pay my deferred element of the consideration. All of those things are well-established approaches to dealing with risk in a deal. Those risks need to be identified for people to be able to understand them and then come up with solutions for them. So, the exciting point is we think those three buckets of price-chipping contractual recourse, and deferred consideration, they’re all perfectly valid ways of dealing with it, but none of them are actually optimal ways of dealing with risk in a transaction. By contrast, optimal approaches can include solving them through more insight into those issues, so you get more comfort with them. We can provide that in a range of ways across people, risk and cyber risk and intellectual property risk, et cetera, et cetera. But secondly, by introducing an insurance instrument, which can take that risk away in a far more attractive way and deal with those potential risks in a far more attractive way, potentially than price chipping or deferring, or getting contractual recourse against the counterparty.

Ross Butler:

And all of this kind of moves you further towards, I suppose, insurance being a purely defensive product. You’ve got a clear line of sight to enhancing returns through all of this.

Alistair Lester:

You’ve teed it up beautifully. So, we talk about what we do is securing investments and enhancing returns. That is our little strapline. We think with our advisory capabilities, we can give you much more insight into what you’re getting into. We think with some of the core traditional insurance solutions that are out there, very plain vanilla, traditional insurance solutions, you can secure that investment. But actually going to your point on enhancing returns, we think that we are able to deliver these structured insurance instruments across a wide range of areas, including structured credit and tax and litigation, et cetera, whereby spending a pound, a dollar or a Euro on that instrument you are realizing or recognizing multiples of that either in the enterprise value or somewhere in the capital structure of the transaction.

Alistair Lester:

That is a very different way to think about insurance, where for most of us, including people who live and breathe it, you know, renewing our car insurance or home insurance, or even our business insurance every year, what you’re really looking for is a way of reducing the cost of insurance, because you see it as a sunk cost. You don’t see it as a return generating instrument, whereas with a lot of what we’re doing, it’s spend a dollar or Euro pound on that instrument, and you will see a multiple of that somewhere in your enterprise value or capital structure.

Ross Butler:

It seems to me that risks over the, say, that 25 year period, have gone from being relatively tangible, relatively geographically, constrained to being much more intangible, much more distributed across the world, less physical and therefore just much more complex. And I suppose, as a result of that, harder to quantify and I guess where there’s complexity there is opportunity, which is why it’s logical for insurance providers to have expanded in this way. Is that a reasonable reading?

Alistair Lester:

I think that’s, that’s a very astute reading Ross. I think this is why Aon has diversified its capability set, for exactly those reasons, And if you double-click on intellectual property, as an example, and intangible assets, as an example, you only have to look at the huge rotation of the S&P500 over the last 40 years, which has gone from being, completely dominated by hard assets, tangible asset values, and companies who operated in those areas to companies, which are absolutely intangible asset rich and intellectual property based. And as a result, by the way, the insurance industry, some argue, has struggled to stay relevant as it could have done growth of global insurance premiums has lagged global GDP growth for that reason, because the insurance products are not as relevant as they need to be to what’s going on in the world traditionally. So, Aon made a move into intellectual property – and this is what Aon has done brilliantly – we have purchased capability and talent in adjacent areas to us. So, we bought a business, which was one of the leading intellectual property consulting businesses. And then what we’ve done is we have worked with that business to deploy that capability into a private equity context. We’ve worked with that business to build insurance instruments that can deal with intangible risk and intangible assets in a way that wasn’t previously being addressed. And we’ve gone one step further by helping to use both of those things, the insights and the capability we have on the advisory side, the risk modeling, the quants capability we have on the valuation side to then build product, which is enabling and opening the door to IP, rich companies, to access financing, using insurance as a collateral around their intellectual property in a way that’s never been possible before.

Alistair Lester:

So that’s an absolutely spot on. What Aon has done over the last five to ten years is it’s added inorganically areas of talent and capability, whether it’s in cyber, whether it’s in intellectual property, the talent world, we’ve added businesses and people who have bought different skill sets to our firm. Many of whom have had zero exposure to the insurance industry before. But actually by bringing these people into our industry, they are giving us perspectives on different emerging risks, which we’re able to support clients from an advisory point of view with, but also match those risks into the huge pool of insurance capital and start to build some new and evolved and developing insurance solutions that, that provide answers.

Ross Butler:

Tell me a little bit more about the, the IP services, in the specific context of venture capital and private equity. What type of business is it most useful for?

Alistair Lester:

So we think that one of the things we’re most excited about is we’ve always had a relatively limited story for the VC end of the private equity and financial sponsor community that is truly value added. We have an ability to identify, map and value the unique intellectual property, particularly the patents, but not just the patents, it can be data. It can be trade secrets, et cetera of individual companies. By doing so, we place a value on that, on that intellectual property, through a proprietary valuation methodology. We have the former head of intellectual property at Phillips in the Netherlands, global head of IP at Phillips. We have the former general accountants of general counsel for patents from Microsoft, right. People who honestly, if you ask them, ‘Would you ever, five years ago, can you ever see yourself working at Aon?’ They would have said, ‘absolutely not. Why would I?’ So we have some unbelievably deep talent in the IP space. I think we have more of the top 300 recognized global IP strategists working for Aon than there are at any other company in the world. And no one would know that right.

Alistair Lester:

We then spent a long time persuading the insurance industry of the efficacy of that valuation methodology, and there are many other parts of the capital market’s ecosystem, which rely on the underlying security of insurance to enable financing. We look in the aircraft, leasing space, residual value insurance on aircraft hall is, is a critical requirement for aircraft leasing. You know, finance use of aircraft leasing require certainty over what the, the aircraft may be worth at the end of the 10 year lease. And the way they’ve got that in the past is through residual value insurance that provides the underlying security, really what we’re doing and intellectual property is a similar thesis. We are valuing the intellectual property for a proprietary methodology. We then were demonstrating the efficacy of that valuation to the insurance market who are then wrapping an insurance policy around that value, not at a hundred cents on the dollar at a discount to the value, maybe 50 cents on the dollar by wrapping insurance security around what were previously intangible assets.

Alistair Lester:

You are turning them into tangible collateral. And what can you do with tangible collateral is you could raise finance against it. So, now we think we’re inventing or pioneering at least a new potential way for firms who are in the maybe series B series C stage to raise working capital and runway capital. Because up until today, the primary way for those firms to raise money has been to raise equity founders that owners don’t like raising equity, it’s diluted, it’s expensive, it’s painful all of those things and actually being able to, or they go and raise venture debt. And venture debt performs an essential service, but also it’s not, it’s got a lot of complexity to it. We think we have an instrument now, which can enable you to access pretty straightforward, not cheap, but pretty straightforward debt secured against an insurance wrapper, which is wrapping your intangible assets. And we think by doing that, we are potentially reinventing how you finance early stage companies. The British Business Bank wrote a paper probably two years ago saying why can’t banks recognize intangible assets more as collateral for financing? We think we are leading the answer to that question, which is- what can you do if you do it in this particular way?

Ross Butler:

I assume that larger businesses with large IP people folio, they’ve got other financing options.

Alistair Lester:

A hundred percent. That’s a great question. But, and yet, we also have clients who are approaching us and asking whether we can collateralize their IP portfolio for the purposes of satisfying pension trustees. Right. For example. So, you know, we need to provide collateral to our pension trustees. Maybe this is a product that we could use to satisfy our pension trustees over pension liabilities and future pension contributions. We’ve got financial institutions who are approaching us and asking whether this is a product that they could use to satisfy some regulatory capital requirements, right. So, you know, is this a product that could satisfy the banking regulators to a certain level that intellectual previously unrecognized intellectual property that they held in their business is now something they can collateralize and use to enhance their financing of, of whatever obligations they have. So it isn’t just the venture answer, but we’re seeing particular appetite and interest in the venture backed community in the early stage businesses area at the moment.

Ross Butler:

That’s a great example of allowing people to focus on the upside and enhance their returns. I don’t want to spend the whole time talking about COVID, but obviously it’s completely changed the nature of, and scale of risk. That touches on so many parts of business, so I’m thinking particularly like cyber, for example. I was speaking to a CEO the other day, he’s based in London, 90% of his employees are in India. Geographically remote. Can’t get out to them very easily. All of these risks seem to be not really thought of, just a couple of years ago.

Alistair Lester:

We launched our cyber- M&A private equity focused business, getting on for two years ago now. We did it for a couple of reasons. Outside of private equity and M&A, Aon had made an inorganic acquisition in a company called Strauss Frieberg, which was one of the leading global cyber risk consultancies that grew up in the US and again, I I’d imagine if you spoke to many of the people inside the original business, they had not had anything to do with the cyber insurance worlds. They were deep cyber risk consulting people. Then we built a client facing delivery of some of the capabilities within that business, and we did that by, we actually bought across people from the big four who were providing private equity, cyber due diligence, which was just emerging two or three years ago. We bought some of those people across. And the exciting thing is, we were able to persuade them of a couple of things, which I think we’ve proven out, which is one. We have the in-house technical cyber capability that we just bought this business with deep technical cyber risk capability. But two, we also have in our industry, a huge amount of data insight from cyber insurance. So we know what is happening in the cyber risk world, because cyber insurers are paying claims for our clients. So we know what’s, what’s creating those claims and we know how much is being paid for those claims and how those claims are being managed and how the risk of being mitigated to avoid them happening.

Alistair Lester:

Again, you put together deep cyber technical expertise with quant data, true deep, rich data over what is actually going on in the cyber world, which is causing financial loss. And you’ve got a unique skillset. So, our cyber team, actually very specific to private equity, have built something called Portfolio Scanner, a piece of proprietary tech, which blends in automated threat analysis with a quant model. We’ve done this for a number of PE firms. You can run it at relatively low cost, to come and run a six month cyber review across your portfolio. You can run it in very quick time, automatically across your entire portfolio, and it gives you a traffic light outfits of which firms in your portfolio need a closer, deeper dive from a cyber risk point of view.

Alistair Lester:

It’s no guarantee that there’s no problems in the ones that are green or amber, but it will tell you from an outside-in point of view, an unobtrusive outside-in points of view, where we think based on outside threat and industry sector knowledge and claims statistics from cyber insurance, you should be going to look Mr. GP to double-check that firm is doing what it should be around cyber risk. We actually ran that for a GP last year. And one of the firms that came out on the red of the traffic lights, we literally just reported to the sponsor. And just 10 days later, as we were going through the action plan, they had a ransomware attack. And that led into a huge recovery exercise. Again, no guarantee that if we ran that exercise six months earlier, the ransomware attack wouldn’t have happened, but certainly there would have been more awareness within that firm of the risks and, and hopefully some, some mitigating actions would have been taken.

New Speaker:

What’s really powerful areas that is all consulting work, but we’re delivering technical and rich data insight in an, in an automated manner, in a highly efficient manner, real time. We are launching and delivering within three to four weeks, not let’s run a long cyber risk consulting project, which takes many months because by the time the speed of the world’s changing so much that, you know, six, nine months’ time, it’s a different threat. It’s a different group of people. It’s a different type of ransomware, whatever it is, you know, you need to be keeping on top of this on a regular basis.

Alistair Lester:

So a lot of our PE funds now are actually running Portfolio Scanner on a regular basis, but at six months or 12 monthly, and they run it, it’s just a, it’s a health check across their portfolio. And it just helps them stay in touch with, with exactly what’s going on. And, you know, we were quite excited. We ran it for Cinven, which reported that in their ESG report.

Ross Butler:

That makes perfect sense to me, marrying the qualitative in the quantitative. I’ve long felt that you have the cyber professionals who are focused on best practice and process, but you’ve also got the kind of the unknown quantitative part, which is the elephant in the room. And you know, companies that pay ransoms, they don’t publicize it, of course. And one suspects that it is a much, much bigger problem than most people realize had they had to send a press release out and it was in the media. And so there’s something of a disconnect between the scale of the problem and what to do about it. And it sounds like you’re able to contextualize the problem and then find the solution, which feels to me like where I’d want to be.

Alistair Lester:

Yeah. Yeah. Look, I think just one thing I’d add is, is I’ve just talked about that in a portfolio context, which is critical. The other thing we’re learning is fascinating is our clients who go through that exercise, looking inside the portfolio, across the portfolio, they almost without fail, ensure they implement pre-investment cyber due diligence as a specific work stream going forward. A lot of firms haven’t been. Or they felt that their IT DD covers cyber. They’re close cousins, but they are distinctly different things. By the way, we’ve also got to make sure we’re okay as we’re going into new deals and this whole workstream of cyber due diligence, which we think where that evolving further into what we call digital and tech DD, where you’re looking at yes, the cyber risks.

We had a client say to us not long ago, every deal is now a tech deal, right. So let’s look at the tech in that business and understand how risk-exposed it is. We just brought a guy in from Turner & Townsend, a well-respected property consultants. Again, not an insurance guy, he’s a risk consulting person, but he’s able now to deliver his risk advice in a much more informed and contextual way because of the data and the insights we can provide from inside the industry. And that’s why we’re bridging the advisory and the risk transfer together.

Ross Butler:

So just so I’ve got the lexicon straight, you’ve got it, diligence, which is like you, your internal systems, and processes, and making sure that they’re efficient and functioning. You’ve got cyber, which is like security and stopping attacks. And you’ve got digital and tech, which is

Alistair Lester:

It’s performance risk. We ran a deal for a PE fund who was buying a, a reasonably well-known real estate platform. Right. And actually what we helped them understand was how many of the hits on the platform were from bots and how many were genuinely from independent consumers, right. And that goes to value. You want to pay for the consumer. So it starts to become not just a risk issue, but also evaluation issue, which is exciting.

Ross Butler:

What about people risk? Do you do anything in that domain? Obviously there’s a link with, with cyber and behavioral behaviors.

Alistair Lester:

We do it very broadly. And I think traditionally again, when people thought, well, what would Aon do in the human capital space to help us? It would be, well, we’ll do some actuarial work on the pension plan, or we’ll do some look at life and medical insurance and make sure that we’re meeting employee benefit risk. But again, Aon bought a business not long ago called QT, now rebranded Aon Assessment Solutions, they are a bunch of psychiatrists and psychologists. We had an infrastructure client who was funds, who was buying a, a bus business. I mean, lots of infrastructure funds by bus businesses. I think EQT had just bought a big one in the US.

New Speaker:

Interesting little story: we were arranging motor insurance for the bus company and they have to have it. And one of the things that drives motor insurance is, is driver’s safety. The price of motor insurance is driven by how safely, how well do you train your drivers. We brought in our Aon assessment colleagues to create a framework for the type of personality that they wanted to hire and to maintain as bus drivers and to put it very crudely, you are looking for people who are less aggressive on the accelerator, on the gas pedal. There are characteristics which are going to lend you to be more heavy or less heavy on the gas pedal. So that had two incredible benefits.

Alistair Lester:

One: By doing that, and by demonstrating to the insurance company that they were hiring that sort of person that puts the risk in a better light, it enables Aon to secure a better price for the core old-fashioned motor insurance for the buses. But here’s the other thing you could also demonstrate: how the fuel consumption of the fleet would reduce and the environmental positive environmental impacts. And of course, the economic positive impact in terms of reduced gas fields and fuel bills for the bus fleet. You’re going to value in way more ways than just one, which is we can help you reduce your insurance premium. We could also help you reduce your operating costs through reduction of fuel consumption, and we can demonstrate that you’re thinking about that through an ESG lens in a world where those things are increasingly important. It’s a really good example of how we’ve gone from being an insurance broker to adding these other elements to a value.

Ross Butler:

And that comes from presumably the psychological profiling of the people

Alistair Lester:

Right. So when you go and hire now bus company, you need to hire people with these characteristics, which we have defined for you, and it’s now built into your, your recruitment processes.

Ross Butler:

There’s a huge change that’s, that’s happening in terms of the work environment. Are you’re doing some thinking on this area.

Alistair Lester:

So again, we have an enormous human capital practice who stretch right across, you know, governance, board consulting, compensation, talent, et cetera. And, and we have, we’re one of the firms we sponsored in various countries, something called the Work Travel convene. So we brought together in Australia, in the US and the UK in different countries, large employers. And we’ve done that over the last 12 months. And this isn’t, you know, the private equity and M&A world, but this is more broadly as Aon. And what we tried to do in the private equity community is then bring the conclusions and the insights that, that are being created from those sort of exercises into P funds into their portfolio. But the work travel convene is really trying to look in that crystal ball about where this is going, what are the implications for the workforce?

Alistair Lester:

One of our big areas of course, is terms and conditions of employment and benefit packages, and how do you construct compensation packages to reflect different working environments and all of those sorts of things. So a huge amount of work in progress on that. And I think a lot of clients are increasingly looking for help in that area, because as you say, there’s so much uncertainty.

Ross Butler:

Yeah. I think also private equity firms are increasingly focusing on people and talent and talent retention is their core asset. And you’ve got private equity firms hiring HR, internal HR people to just think about that within the portfolio.

Alistair Lester:

Again, one thing that people won’t know probably is Aon has two businesses, one called Radford, and one called McLagan. They are two leading compensation consulting and compensation data businesses. In fact, McLagan is probably recognized in the general partner and the, in the PE community as being the leading private equity compensation consultant in the world. We know we build many of the, many of the maps, many of the GP carry plans, they come through McLagan insight, but again, Aon in the past culturally McLagan would have been run as a very independent business, delivering his value to its clients in a, in a slightly isolated way.

Alistair Lester:

The way that the firm has been reorganized in the last few years is, is around what we call Aon United which is really about bringing the whole of the firms and the clients, and the fact that we have people who are delivering compensation and talent advice to a large number of PE funds, you then think about how can you maximize compensation particularly through carry of your general partner practitioners through the ever-increasing adoption of innovative solutions and innovative financing structures, right? So those things are linked as well. We can help you maximize returns in your portfolio companies, which then drive your compensation structure that we’ve helped you put in place by the way, through these ideas over here. So, these things are not all individually separate from each other. They are all intertwined.

Ross Butler:

I’ve got a couple of other COVID things on my list. Supply chains, which I assume is bread and butter for insurance services, but global supply chains, given international relations and protectionism, is, it’s not in a good place.

Alistair Lester:

That’s a critical factor. One of the most important parts of the insurance world, which is probably overlooked is two areas, but one is business interruption insurance. That’s come under the real spotlight as a result of COVID. I mean, let’s be honest and, and not necessarily the most positive spotlights, and we’ll see how that all plays out, hopefully positively for policy holders who have valid claims. People in our industry have been talking about supply chain risk for a long time. I think what COVID has done is accelerate that and now there really are needs for firms to really, truly understand their supply chain, but not just because of the, the revenue and the, and the financial risks, but also increasingly through an ESG lens as well, you know, modern slavery background checking, all of these sorts of things are really important in the supply chain.

Ross Butler:

I’ve written a couple of things down from your preamble, but I can’t quite read my writing. Judgment preservation insurance. Is that right? Yeah.

Alistair Lester:

So that’s a, that’s a new area we’ve developed over the last year or so. So we’ve invested heavily in, in our litigation risk group. So there again, there is a theory, a thesis that we would like clients to see litigation as a potential asset, rather than just something they unfortunately have to go through. If you’re bringing a claim against somebody and you believe you’re going to win. And more than that, perhaps you’ve won at the first quarter or the second court. We developed a product which will enable you to ensure as much of that judgment as you can. And in the event that it progresses to the next layer and you lose, then the insurance, it provides you that, that capital. And here’s the thing that that’s really exciting. So we just closed the deal for a client who had won a significant judgment against the large US firm. And we were able to secure several hundred million dollars of insurance, which by the way, it was not the total amount of the judgment award. It was a substantial tranche of it, but by no means a majority, we were able to secure some, several hundred million dollars in judgment preservation insurance, which very simply said in the event that this is overturned, you are going to be indemnified by the insurance company, and that’s nice to have, right. But here’s the really positive and interesting thing: that firm was then able to use the judgment preservation insurance to access third party financing. So the insurance became collateral to access financing. Litigation funding has become a big thing, right? Litigation financing has been around a long time. It’s absolutely got a place. It provides a very essential service. But we are introducing new ideas, which potentially are alternatives to that, arguably again at a lower cost of capital. And that’s super exciting. We’ve hired people in our firm from litigation, funders and litigators who understand that world. And what we’re really doing is using their knowledge and insight with our capability of building insurance, structured insurance instruments and structured products to, to redefine how, how clients can, can see, find value in those sort of situations and see them as assets.

Ross Butler:

In a private equity context, every moment counts, it’s the distraction, I would imagine more than anything, you don’t want it as a standing board item, when you’re trying to grow a business fast.

Alistair Lester:

This is exactly right. And certainly when you come into exit, right, what you do not want is uncertainty over litigation and exit. So we do a significant amount of wrapping up litigation like we do within the tax world. What insurance is very good at Ross is, is rapping, is bridging low probability, but high financial risk situations into certainty, right? And of course that costs money, which is the premium. But that’s what insurance can be very good at. And if you can, you can do that increasingly with tax. Some brilliant advisors around the world will tell clients, this should be fine. What you get from the big four, what you get from the lawyers is we’ve done this before. This should be fine. What you don’t know is whether someone on the other side of the deal table to you has the same view.

Alistair Lester:

Maybe they are a large conservative, strategic, maybe it’s the first time they’ve done a deal in that jurisdiction, whatever their motivations are for feeding the risk, the perception of the risk is different to your perception of a risk. And those are the sorts of things that can derail deals, right? They can get, they can, they, you know, they, they become distractions from actually, this is fundamentally a good business. We want to buy here, but we’re getting distracted by negotiating and arguing over whether we think this one piece of litigation is more or less likely to happen or more or less likely to cost this amount of money, right, and insurance can deal with those situations by giving you a well, we can sell you, it will cost you this to take this issue away. Now, all of that cost makes sense in the context of the data.

Alistair Lester:

It doesn’t, but at least it gives you something, a point of certainty, which you can get a resolution on and that’s becoming much more understood and that’s relevant in tax too. And you can push further by the way, without getting too off piece into further adjacencies around structured credit. So the same broad thesis Ross applies in receivables financing. So one of the things COVID has done is really drive a real increase in the amount of receivables financing that go on in the market. What many don’t appreciate is if you can wrap insurance around those receivables in an appropriate manner, you can de-risk that portfolio receivables. If you’re de-risking that portfolio of receivables, you can arguably lengthen the tenor and reduce the coupon on the financing terms you’ve got. So it’s the same thesis. And just in a slightly different situation.

Ross Butler:

So do you have a classic CEO 3 or 5 year vision for Aon in M&A?

Alistair Lester:

I do. We’re living in the middle of the hottest market we’ve seen in, in a long time. We’ll see how long that lasts. But I think, I still think we’re scratching the surface in terms of the value we can bring to our clients. If I’m really harsh on ourselves, we still are delivering one or two of our core traditional value propositions into a deal. And actually if we just paused and, and delved a little deeper into the deal or had the right conversation in the right way at the right time, there are multiple live opportunities that we have allowed our clients to leave value on the table because we haven’t been either able to identify or able to articulate how we could find a way to help them to, to find that value and bring that value off the table. So that’s really the key thing. I think we’ve grown enormously in the last three to four years. There is still huge white space for us, we think because there’s just, we’re very fortunate. We’ve got an incredible breadth of services and we’re backed up by this incredible ability to bring capital, to bear in a way which hasn’t happened before. And honestly, we’re scratching the surface.

Ross Butler:

Alistair, thanks so much for your thoughts and for coming on to Fund Shack. 

 

Alistair Lester:

Listen, thank you so much for having us Ross. It’s been great.

 

#23 Simon Witney on sustainability rules and corporate governance

Fund Shack
Fund Shack
#23 Simon Witney on sustainability rules and corporate governance
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Subscribe on Apple Podcasts | Spotify 

Simon Witney on sustainability and corporate governance.

In this episode, I’m speaking with Simon Witney, who’s probably the best known private equity lawyer in Europe. He’s currently a senior consultant at Travis Smith where he spends much of his time advising clients on sustainability. He’s been chairman of the BVCA’s Legal and accounting committee and Invest Europe’s Tax legal and regulatory committee. He is a visiting professor in practice in the law department of the London School of Economics, where he teaches.

And he has a new book out published by Cambridge university, press called Corporate Governance and Responsible Investment in Private Equity. Our conversation is in two parts. Firstly, we look at the new sustainability regulations and what they mean for companies and investors. And then we go on to look at corporate governance itself.

You can watch the video version (with speed controls and bookmarks here.)

Enjoy!

 

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